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Access to public transport and labor informality

Poor public transport can reduce employment in
the formal sector

Elevator pitch

Public transport infrastructure has not kept up
with the demands of growing populations in cities in developing countries.
Infrastructure provision has historically been biased against less affluent
areas, so access to formal jobs is often difficult and costly for a large
part of the lower-income population. As a result, low-income workers may be
discouraged from commuting to formal jobs, lack information on job
opportunities, and face discrimination. Through these channels, constrained
accessibility can result in higher rates of job informality. Reducing
informality can be a target for well-designed transport policies.

Key findings

Pros

Improvements in accessibility to
public transport can lead to lower rates of informal
employment.

The availability of more and better
public transport can increase access to information about job
opportunities available to workers.

Lower public transport costs can
encourage lower-income workers to switch from home-based
informal occupations to formal jobs, which are often
concentrated in central areas.

Lower commuting costs can have a
positive impact on formal job creation through their effect on
formal wages.

Cons

Transport subsidies may have
different effects on unemployed and informal workers, especially
where informal employment offers an attractive alternative to
formal employment.

The channels through which
constrained accessibility may result in higher informality are
not yet fully identified.

The design of appropriate transport
policies requires more information on the commuting choices of
informal workers.

The effect of increased transport
accessibility on job choices must be evaluated as part of the
socio-economic impact of transport projects.

Author's main message

The provision of more equitable transport can
reduce urban inequality by broadening job choices. Better public transport
may encourage low-income workers to switch from home-based informal
occupations to formal jobs in central areas. Because the effects on informal
employment of transport subsidies targeted to the poor are not entirely
clear, policies should focus on strategically expanding the transport
network to ensure all commuters a minimum level of provision and quality.
Defining such a strategy is particularly relevant for cities facing large
public transport project delays and tight budgetary constraints.

Motivation

The bulk of formal jobs in developing countries
are in central, high-income urban areas, while informal employment is
concentrated in lower-income peripheral areas. This center-periphery
division is reinforced by a suboptimal and skewed provision of urban public
transport. For instance, in Bogotá, Colombia, thousands of low-income
workers, most of them informal, are concentrated in the poor, southern part
of the city. Traveling just 2–3 kilometers can take an average of 60
minutes. Meanwhile, traveling the same distance in the richer and less
densely populated northern area of the city takes only 35 minutes [1]. Commuting is also financially
more costly for the poor. The poorest residents of Bogotá spend more than
20% of their income on transport, whereas the richest spend only 5% [1]. Under these circumstances, can
more equitable transport provision be a way to reduce labor informality?

Discussion of pros and cons

In many large urban areas in the developing
world today, a large segment of the lower-income population faces higher
commuting costs, longer commuting distances, and longer commuting times for
the same distance traveled. This situation has resulted from a history of
transport infrastructure deficits, prioritization of cars over other
transport modes, and, in some cases, lack of awareness of the benefits of
more diverse and equitable transport provision. For example, on an average
day in São Paulo, Brazil, the wealthiest residents take almost twice the
number of trips as the poorest residents, who are mostly informal workers
(see Illustration). The difference
reflects a low mobility index (ratio of the number of individual trips to
the total number of people in each income class) for individual transport
modes (for example, by car), which is not offset by a higher mobility index
for collective transport modes (for example, buses and subways).

Although there are many potential channels
through which constrained transport accessibility could lead to more
informality, not much evidence is available on the job-related costs of
insufficient, deficient, and skewed public transport. Informal workers tend
to be concentrated in areas of deficient public transport. In general,
informal workers face more precarious working conditions than formal
workers: they may receive lower compensation, do not contribute (or have
access) to the pension system, have no record of job experience or
opportunities for advancement, are not eligible for subsidies and leave
(maternity, sickness, vacation), and have difficulty getting credit. For the
economy at large, the existence of informal employment implies losses in tax
revenues and productivity, as well as a heavy burden of social protection
costs [2].

Studies of the informal sector attribute its
existence and persistence mainly to factors such as social protection
subsidies and minimum wage regulations; the role of transport
accessibility has hardly been examined. One exception is the extensive
research on the spatial mismatch hypothesis, which looks at the
relationship between accessibility and labor market outcomes, especially
in the case of racial and ethnic minorities in US and European cities.
The spatial mismatch hypothesis
considers adverse labor market outcomes of minorities to be a result of
spatial disconnection between low-skilled jobs and the places where
minorities reside.

How can distance to jobs result in worse
labor outcomes? The spatial mismatch literature identifies several
mechanisms through which constrained physical access to jobs can result
in more unemployment [3]. That analysis can
be extended to explain how these mechanisms can lead to more informal
employment. Figure 1 summarizes these mechanisms.

First, when commutes are long and costly,
workers may decide to work informally from home instead of accepting an
offer for a formal job farther away. Furthermore, lower-income workers
in search of formal work opportunities may be reluctant to commute to
central areas where formal jobs are concentrated, instead limiting their
search to their local neighborhood, where informal employment may be
more prevalent.

Second, lower-income workers residing in
areas with poor transport accessibility may be discriminated against by
employers. Formal employers may be concerned about the consequences of
long commutes on workers’ performance but yet be reluctant to offer
compensation for commuting costs. These effects are likely to be more
pronounced when formal jobs are centralized (when there are no large
employment centers absorbing low-skilled workers in urban peripheral
areas), when the gap between formal and informal wages is narrow, when
home-based informal labor is common, and when the areas in which a
substantial proportion of lower-income workers reside have poor public
transport accessibility.

The spatial mismatch hypothesis has been
tested empirically using different approaches. Because residential
choices are not randomly assigned, the endogeneity of residential choice
makes it methodologically challenging to estimate the causal effect of
employment access on employment outcomes [3]. Some studies have used
quasi-natural experiments and randomized controlled experiments, as well
as statistical methods such as instrumental variables strategies, to
distinguish the causal effect of accessibility on labor market outcomes.
The findings are mostly supportive of the idea that constrained
accessibility is partly responsible for the adverse job outcomes of
racial and ethnic minority workers. However, some studies using
regression models that do not correct for endogeneity find no effect of
public transport-related variables on the unemployment rates of
minorities, thus contradicting the main postulate of the spatial
mismatch hypothesis.

Evidence on strategies to ease the
negative effect of spatial mismatch

If accessibility is indeed a factor
restricting workers from improving their work prospects, the right
policies can counteract some of the negative effect of spatial mismatch.
Proposed policies include expanding access to jobs by improving
transport connectivity and lowering cost, moving jobs closer to workers,
and moving workers closer to jobs. This section focuses on evidence for
the first strategy, which can be realized by expanding transport
networks and establishing transport subsidies.

Studies on transport expansion for the US
and Europe that used quasi-experimental designs and difference-in-differences
methods to isolate the effect of transport expansions on job
outcomes and earnings find a direct and positive impact of improved
accessibility [4], [5]. A seminal paper based on
data on hiring before and after the expansion of the Bay Area Rapid
Transit (BART) subway system in San Francisco finds that the hiring of
Latino workers increased around a new station [4]. A recent study for Denmark
uses panel data at the individual level to study the effect of opening a
new subway station in Copenhagen [5]. It finds that improved
public transport accessibility has a positive and significant impact on
earnings through its effect on increased access to better paid jobs.

Additionally, there is recent evidence for
the US on the effect of a transport subsidy for low-income workers from
a study using an experimental design. The study finds support for the
job search mechanism: previously unemployed individuals who received a
public transport subsidy increased their job search intensity compared
with individuals in the control group [6].

A particularly relevant study analyzes the
effect of local improvements in public transport on local poverty rates
using proximity to the subway in the outer boroughs of New York City and
rail expansions in 16 other US metropolitan areas [7]. The study took place in the
context of rapid suburbanization of jobs and concentration of car-less
poor people, mostly African-Americans, in central cities. The underlying
theoretical model considers two income groups, the rich and the poor,
that choose between cars and public transport, with cars assumed to be
faster and more expensive than public transport. The rich prefer car
commuting and more housing space, while the poor seek proximity to
public transport, the cheaper mode. Different urban configurations
emerge from the model as the cost of cars as a share of income declines.
Under specific values for the income elasticity of housing demand and
other parameters, local poverty rates rise as a result of local
improvements in public transport.

An obvious concern is how the different
spatial structure of cities in developing and developed counties affects
the predictions of the spatial mismatch literature. In US metropolitan
areas, for example, residential density decreases with distance, and
jobs have moved to the suburbs, with racial and ethnic minorities often
living in planned social housing projects far from job centers. In
developing countries, by contrast, jobs are concentrated in city
centers, while dense informal housing settlements have sprung up in
peripheral areas around large cities, where informal employment
predominates and there are few formal jobs.

Studies for developing countries have
focused on the effect of transport access on unemployment but have
disregarded informal employment as a choice for workers who face high
commuting costs. A recent study offers the first attempt to relate
public transport access to informality rates by estimating the impact of
public transport expansions on local informality rates for the São Paulo
Metropolitan Region [8]. After controlling
for endogenous selection by using a historical transport infrastructure
plan as an instrument for transport expansions, the study finds that
informality rates decline by about four percentage points in areas
receiving new transport infrastructure compared to areas that were
supposed to receive new transport infrastructure but did not because of
project delays.

Another recent study is the first to use an
experimental design to test the effect of accessibility constraints on
labor market outcomes in a developing country setting [9]. The study finds that a
transport subsidy can help reduce youth unemployment through its effect
on job search intensity.

In contrast, however, another study uses a
theoretical urban search model to investigate the impact of transport
subsidies on informality rates [10]. The study finds that a
transport subsidy targeted exclusively to informal workers may have no
impact on informality rates, while a non-targeted transport subsidy, or
a subsidy targeted to formal workers, can lead to a reduction in
informality rates. In this model, formal workers commute every day to
the city center, where all formal jobs are concentrated. Informal
workers commute less frequently, as they have the additional choice of
working at or near home. In this context, formal firms have to offer a
“spatial compensation” as part of the formal wage in order to attract
workers because urban costs (commuting costs and housing rents) are
higher for formal than for informal workers. Formal workers incur higher
work-related commuting costs than informal workers because they commute
more frequently to the city center. For the same reason, they prefer to
live closer to the city center, even though housing rental costs are
higher due to tight competition among workers seeking to minimize
commuting costs. A transport subsidy targeted exclusively to informal
workers raises the spatial compensation formal firms have to pay to
attract workers because the subsidy lowers urban costs for informal
workers, increasing the urban cost gap between formal and informal
workers. A larger spatial compensation leads to higher formal wages and
consequently to lower job creation in the formal sector and higher
informality rates.

Limitations and gaps

As is clear from the analysis presented here,
the empirical evidence on the effect of transport policies on job outcomes
for developing countries is fairly scarce [11], [12]. This is surprising, as it is
precisely cities in developing countries that face the most pressing
mobility issues and that have the highest levels of segregation between low-
and high-income workers. A focus on the channels through which constrained
accessibility may result in higher informality may be particularly fruitful
for informing the design of appropriate policies, as different channels may
require very different approaches. New studies can take advantage of an
extensive literature on the existence and persistence of informal sectors in
developing countries and on the socio-economic impacts of transport
infrastructure.

It is unclear to what extent these findings on
the impact of improved accessibility for the US and Europe can be directly
extended to developing countries. In US metropolitan areas, residential
density decreases with distance, formal jobs have moved to the suburbs, and
in some instances racial and ethnic minorities have been moved into planned
social housing projects far from job centers. In contrast, peripheral areas
of large cities in developing countries are the locus of dense informal
housing settlements, with a predominance of informal employment and low
availability of formal jobs. An obvious concern is how the different spatial
structure of cities in developing and developed countries affects the
predictions of the spatial mismatch literature. Are there additional
mechanisms at work in developing countries because of the prevalence of
informal employment?

Both the theoretical and the empirical evidence
on the effect of transport expansion have focused on cases that assume a
monocentric urban form—urban areas in which most jobs are concentrated
within a single center. The effects clearly depend on the level of
centralization of low-skilled formal employment. This urban structure seems
to correspond to that of many large cities in developing countries; however,
it is relevant to consider how the existence of alternative structures with
multiple job sub-centers can affect the relationship between job
accessibility and informality.

The role of cars in determining job outcomes
also becomes relevant if new job sub-centers arise in areas with low public
transport accessibility. Although there is a rich literature on polycentric
cities and car accessibility for developed countries, the evidence for
developing countries is still thin. Future research could consider the
determinants of job decentralization in cities in developing countries, the
relationship of evolving urban forms and public transport provision, and
policies for moving jobs closer to workers that best reflect the role of
polycentrism and choice of transport mode.

The empirical evidence on the effect of
transport subsidies targeted to low-income groups is very narrow for Europe
and the US and virtually nonexistent for developing countries. Knowing more
is important, as these subsidies are likely to be part of broader equity
policies. In Bogotá, for instance, a transport subsidy targeted to the poor
has been implemented since 2014, but its effects on social outcomes are
still unknown [10]. It would also be interesting to
know how the impact of the subsidy evolves over time, and how it fares
compared with other transport policies focused on expanding the urban
transport network and improving the quality of transport services.

Along these lines, more evidence is needed on
the mediating effect of transport access on policies that seek to move
workers closer to jobs, such as residential mobility subsidies. Recent
studies indicate the importance of considering job accessibility in programs
to reduce residential segregation. In particular, in developing countries,
residential mobility vouchers can be made conditional on relocating closer
to suitable formal jobs [12], taking into account
the location patterns of new low-skilled jobs and transport options.

Furthermore, studies of transport policies have
focused on the effect of transport access on unemployment but have failed to
consider that workers may find employment in the informal sector. Unemployed
and informal workers may have different sensitivities to changes in the cost
of accessibility, particularly where informal employment is an attractive
alternative to formal employment. Evaluations of transport policies in local
communities should also consider the size and composition of the local
informal sector. More evidence is needed on the transport choices of
informal workers in different areas of cities. It would be particularly
relevant to know to what extent, both qualitatively and quantitatively,
improved access would motivate different types of informal workers to switch
to formal jobs located far from their residence.

There are also limitations to the current
evidence for developing countries. The quasi-experimental and experimental
evidence is preliminary [8], [9] and cannot be generalized to
other cities or time periods and fails to account for possible feedback or
general equilibrium effects. Theoretical work identifies plausible channels
through which changes in accessibility can affect informality, but these
have not been subject to empirical research.

Finally, how transport infrastructure affects
employment choices where informal jobs are an option requires more study.
There is a body of literature on transport and equity in developed countries
that suggests the importance of considering the impact of transport
infrastructure projects on socio-economic outcomes related to inequality
[13]. Similar studies of the effects
of transport projects on inequality and segregation are needed for
developing countries, particularly through their direct and indirect effects
on the employment choices of lower income workers.

Summary and policy advice

Difficulty getting to areas with concentrations
of formal jobs because of gaps in public transport may be partly responsible
for the existence and persistence of informal employment in cities in
developing countries. The possible channels connecting public transport to
job accessibility and informality include a preference for home- or
neighborhood-based informal occupations over formal jobs because of high
commuting costs to the areas where formal employment is concentrated, less
information about formal job opportunities because of difficult access, and
discrimination by employers based on place of residency.

Although more evidence is needed on the extent
of the problem and the precise channels through which it occurs, enough is
known to suggest that the impact of public transport infrastructure projects
on job choices should be considered within a wider agenda of more equitable
transport systems. Because low-income workers are particularly dependent on
public transport, better access to public transport can reduce inequality by
improving labor market outcomes. Transport policies should focus on
expanding the public transport network in an effective and strategic way, so
that all commuters are ensured at least a minimum level of transport
provision and quality standards. Defining such a strategy is particularly
important in cities experiencing large public transport project delays and
tight budgetary constraints. If there is indeed a connection between
inadequate access to formal jobs and higher levels of informality, other
policy interventions may be needed to take into account any possible
intended or unintended effects of these policies on the incentives to work
informally. Examples include residential vouchers and transport subsidies
that take into account the location patterns of new low-skilled jobs and
transport options.

Acknowledgments

The author thanks an anonymous referee and the
IZA World of Labor editors for many helpful suggestions on earlier drafts.
Previous work of the author contains a larger number of background
references for the material presented here and has been used intensively in
all major parts of this article [8], [10]. Financial support from a Marie
Curie Intra European Fellowship (PEIF-GA-2013-627114) within the 7th
European Community Framework Programme is gratefully acknowledged.

The spatial mismatch hypothesis

The spatial mismatch hypothesis was inspired by
the rapid residential suburbanization around metropolitan areas of the US in
the second half of the 20th century. As people moved from the cities to the
suburbs, firms also dispersed from central areas within cities to take
advantage of agglomeration externalities (the benefits that firms obtain by
locating near each other) in suburban areas and to escape increasing
congestion and rent prices in cities. As minorities were slower to relocate,
allegedly because of housing market discrimination and zoning regulations,
there was an increase in the concentration of minorities in inner-city
areas, where low-skilled job creation was slow.

How difference-in-differences estimation isolates treatment effects

One way to deal with an inability to conduct an
experimental design with random assignment to treatment and control groups
is to use difference-in-differences estimation. Observational data can be
used to compare the average change over time for the outcome variable in the
treatment group with the average change over time for the outcome variable
in the control group. The average change in the control group is then
considered to reflect what the outcome would have been in the treatment
group without the intervention.